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Economic Readings

Economy gains less than expected The economy grew at a faster pace in the spring, but not quite as fast as expected, according to a government reading likely to spur further debate over whether the economy has fallen into a recession. The gross domestic product, the broad measure of the nation's economic activity, grew at an annual rate of 1.9% in the three months ended in June. That's up from a revised 0.9% growth rate in the first quarter. Even with much stronger growth, the reading was weaker than expected, as economists surveyed by Briefing.com had forecast growth of 2.3%.Growth was helped by more than $140 billion in economic stimulus checks sent out to taxpayers during the period, which helped support spending in the face of higher prices. But some economists, most notably Federal Reserve Chairman Ben Bernanke, have worried that with those checks already cashed, spending and economic activity could now slow in the second half of the year. The first quarter reading was revised lower from a 1% growth estimate a month ago. The Commerce Department also revised the fourth quarter 2007 reading to -0.2%, the first reading below zero since the 2001 recession. The previous fourth quarter reading was 0.6% growth.

• U.S. Recession May Have Begun in Last Quarter of 2007, U.S. Economy Still on the Right Road,

• Jobs, GDP, & GM [08-01-08 10:35 AM] BNN talks to Peter Morici, economist, professor of business, University of Maryland. Last half is devoted to GM and the Auto Industry. First rate discussion(s).

GDP and Investment The BEA reported that GDP increased 1.9% in Q2 2008 at a seasonally adjusted annual rate (SAAR). But the underlying details - especially for investment - are weak. Residential investment (RI) declined at a 15.6% (SAAR). Investment in equipment and software declined 3.4% (SAAR). The lone bright spot for investment was non-residential investment in structures. Non-RI structure investment increased at a 14.4% SAAR. But all evidence suggests this investment is about to slow sharply. This first graph shows the typical relationship between residential investment and non-residential investment in structures. Note that residential investment is shifted 5 quarters into the future on the graph (non-residential investment usually follows residential by about 4 to 7 quarters). The current non-residential boom has gone on a little longer than normal, probably for two reasons: 1) there was a slump in investment following the bursting of the tech bubble, and 2) loose lending standards kept non-residential investment lending strong until mid-year 2007, and it takes time to build non-residential structures. All signs suggest that the bust is now here, and non-residential investment will probably be a drag on GDP for the next year or more. RI as a percent of GDP is at 3.5%, just above the cycle lows in 1982 and 1991. It is possible that RI, as a percent of GDP, will bottom later this year (or possibly in early 2009) since inventory is finally declining (housing starts are now below housing sales). When RI finally bottoms, the good news is RI will no longer be a drag on GDP, but the bad news is RI will probably not recovery quickly because of the huge overhang of inventory. Unfortunately, by the time RI bottoms, non-residential investment will probably have taken over as a significant drag on GDP - suggesting the recession will linger. Investment is usually the key to the economy, and investment remains weak.

Weekly Applications for Jobless Benefits Hit 5-Year High The number of people filing claims for unemployment benefits jumped last week to the highest level in five years, reflecting in large part a new government outreach effort to locate people eligible for benefits. The Labor Department reported Thursday that the number of applications for jobless benefits soared to 448,000, an increase of 44,000 from the previous week. That was far worse than the decline of 8,000 that economists had been expecting. However, the government attributed much of the big jump to a special outreach program to notify people that they could qualify for up to 13 weeks of additional benefits because of legislation Congress passed in June. When people came in to apply for the extended benefits, state claims officials discovered that many of them were eligible for another round of initial claims because they had held jobs for a brief period after exhausting their original benefits. Labor Department officials said that these special factors played a big role in pushing claims higher last week. The jump was the biggest one-week increase since claims soared by 94,000 the week of Sept. 10, 2005, following a wave of layoffs in the wake of the devastation from the Gulf Coast hurricanes that year.

• Weekly Claims Hit 5 Year High

U.S. Employers Cut 51,000 Jobs, Fewer Than Forecast; Jobless Rate at 5.7% The U.S. unemployment rate rose to the highest level in more than four years as employers cut jobs again in July, increasing the threat of a deeper economic slowdown. Payrolls fell by 51,000, less than forecast, after a decline of 51,000 in June, the Labor Department said today in Washington. The jobless rate rose to 5.7 percent, from 5.5 percent the prior month. As recently as April, the jobless rate was 5 percent. ``This is further evidence the economy is in a recession, probably a shallow recession,'' said Nariman Behravesh, chief economist at Global Insight Inc. in Lexington, Massachusetts. ``It will be a major drag on consumer spending.'' The last time the unemployment rate climbed so much in four months was in 2001, when the U.S. was last in a recession. Job losses have combined with decreasing property values, stricter lending rules and near-record energy prices to send consumer confidence levels close to the weakest in 16 years in July.

• 76,000 private jobs eliminated as unemployment jumps to 5.7% Private employment declined by 76,000 (ADP guessed it would be +9,000)  Job growth is now negative on a year over year basis on both the Payroll survey and the Household survey. Since November, private payrolls have laid off 665,000, but even that doesn't tell the full story.  In that same time frame, 1.7 million full time jobs have disappeared and the reason the total loss is 665,000 is because the remaining former full time jobs are now part time. 

• Birth Death Model adds 90,000 phantom jobs Just the difference in these 3 categories alone mean the difference of -90,000 jobs.  If it hadn't been for the model getting it wrong, the overall BLS jobs number today of -51,000 could easily be -141,000. 

Employment? Its Typical for a Recession...The economy has produced 6 consecutive months of job losses. While lots of people are discussing how "resilient" the economy seems to be, they are missing the bigger picture. Employment losses are unfolding as they usually do in the part of the business cycle called "Recession."Contrary to popular belief, this is what early stage contraction employment looks like: Merrill Lynch's David Rosenberg points put that "the six-month change in payrolls is now running at -438k. This is the same six-month change as June/01 when the economy was three months into the downturn. Go back to the prior recession and in October 1990 that six month change was -327k. That recession started in July." Why are ppeople so confused about employment?  Blame the birth-death model. It didn't exist in the current format last recession, and is artificially propping up NFP data. Rosenberg estimates that and the true job loss this year could be closer to one million.

Commercial bankruptcies soar, reflecting widening economic woes Driven by a sour economy and skittish consumers, U.S. business bankruptcies saw their sharpest quarterly rise in two years, jumping 17 percent in the second quarter of 2008, according to an analysis by McClatchy. Commercial filings for the first half of 2008 are up 45 percent from last year, as the national climate for commerce continues to deteriorate amid rising energy and food costs, mounting job losses, tighter credit and a reticence among consumers to part with discretionary income.It was the 10th straight quarter that business bankruptcy filings have increased. Nearly 29,000 companies filed in the first half of 2008. Another 60,000 to 90,000 others probably have closed, because roughly two to three businesses fold for every one that files for bankruptcy, said Jack Williams, resident scholar at the American Bankruptcy Institute. The vast majority of these failed companies are among the nation's 23 million small businesses, with fewer than 100 employees. Their fortunes have tumbled as the national economic downturn has deepened. "The climate is turning desperate for small businesses," said George Cloutier, founder of American Management Services, a consulting firm that helps small companies increase profits. "They are in crisis, and, as these numbers show, it's getting worse and worse."

The credit crunch comes to the mall The credit crunch isn't just for Wall Street anymore. Penny-pinching consumers are skipping the mall, as big bankruptcy filings this week attest.While the failures of the Mervyn's department store chain and Bennigan's and Steak & Ale casual restaurants may seem mundane - there are other places to get a chicken pesto panini - they're more evidence of a consumer pullback that poses still another threat to an economy hampered by a loss-soaked banking sector. Despite the earlier predictions of economic policymakers and other Pollyannas, sliding housing prices and the surging cost of energy and food are clearly hitting the consumer. PNC's Household Stress Index is above its levels of the 2001 recession and approaching its 1990 highs. Those stresses are showing up in the service sector. Besides the news from Bennigan's and Mervyn's, in recent weeks Starbucks (SBUX, Fortune 500) and Talbots (TLB) have announced cutbacks, and discount apparel chain Steve & Barry's filed for bankruptcy. In May, household goods seller Linens 'n Things filed for Chapter 11 protection. In February, retailers Wickes Furniture, Sharper Image and Lillian Vernon all sought refuge from their creditors. Along with slowing sales, the struggling retailers have been hit by heavy debt loads that became more onerous to service as profits plunged. A look at other numbers suggests that unhappy trends have been building for some time. Adjusted for inflation, retail sales dropped 2.6% from a year ago in the second quarter, marking their third straight quarter of contraction, according to Northern Trust economist Paul Kasriel. Meanwhile, personal bankruptcies rose 30% from a year ago in the first half of 2008, according to the American Bankruptcy Institute, while business bankruptcies were up 39% in the first quarter, the latest available data. The trends are ominous as investors consider the prospects for the end of a year that so far has seen the collapse of Bear Stearns, IndyMac and Countrywide and the near collapse of Fannie Mae and Freddie Mac.